Committees can’t be super-regulators, says RBI

Clearly concerned that the financial stability and development council (FSDC) proposed by the government might dilute its authority, the Reserve Bank of India (RBI) went public about its reservations on the government's plan, which is believed to reduce the regulator's role in ensuring financial stability.

Taking a dig at the very structure of FSDC, RBI said in its annual report for 2009-10 released on Tuesday, ''There has to be a clear recognition that committees cannot assume executive responsibility for financial stability, especially in a crisis situation where speed and surprise could be the key elements of response.''

The central bank said explicit demarcation of responsibilities could help in strengthening crisis prevention process, through speedy and effective response in the demarcated areas. ''Clarity in responsibilities is critical for effective accountability,'' it added.

In the budget for 2010-11, the government had announced that the council would be set up for strengthening institutional mechanism for stability. In a discussion paper regarding the role and scope for FSDC, the government suggested setting up two committees, one headed by the RBI governor and the other by the finance secretary.

The finance ministry has prepared a discussion paper on the role of the council that was circulated among financial market regulators for their response.

Earlier this month, RBI governor D Subbarao had said in Hyderabad that financial stability should be the explicit mandate of the central bank, though he did not mention FSDC in that context.